Investing is more like poker than chess

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willthrill81
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Investing is more like poker than chess

Post by willthrill81 » Fri May 04, 2018 12:37 am

In the most recent episode of the "Money for the Rest of Us" podcast by J. David Stein, he reviewed Annie Duke's book "Thinking In Bets: Making Smarter Decisions When You Don’t Have All the Facts." I've heard of this book before, and while I haven't read it, the general gist that I get from the book is a very solid one: investing is not a computational exercise like chess (which I enjoy very much) but much more like a poker game, where the outcome is rarely known with 100% certainty. I think that this has very real implications for investors.

Chess is more of a computational exercise than a game. There is nothing hidden from either of the players, and there is no luck at play; it is a 'game' of pure skill. A significant skill advantage will enable one player to beat another virtually every time.

Poker has a definite element of skill to it as well, but there is also a large degree of luck in the game, particularly in the short-run. A significant skill advantage here will enable one player to beat another over the long-run, but over the short-run, anything can happen.

All too often, investors behave as if investing is like chess, looking for patterns, analyzing historical performance, Sharpe ratios, the efficient frontier, valuations, etc. as if there is a single perfect solution to their needs (literally perfect solutions exist in chess, but they are extremely difficult for most humans to find unless there are very few pieces in play). While all of these activities certainly can provide some value, we must be careful to never take them so far as to think that we can predict what will or will not happen. Most of us understand this well when it comes to predicting returns, but it literally applies to every aspect of investing. We don't know what inflation, valuations, yields, dividends, exchange rates, the dozens of different risks, etc. will be at any point in time in the future.

Investing, and personal finance in general, is more like poker: we're playing the odds while also trying to not be forced out of the game due to the occurrence of an event we perceived to be unlikely. For instance, we frequently need to allocate some portion of our portfolio to asset classes that are volatile but have been historically likely to have relatively high returns, but we also need to hedge our bets so that we will not be wiped out if the volatile asset classes don't perform the way we want them to. But even so, failure to achieve our goals is always a possibility. All roads carry risk.

We're playing the odds when we invest, not solving a math problem.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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SimpleGift
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Re: Investing is more like poker than chess

Post by SimpleGift » Fri May 04, 2018 1:18 am

willthrill81 wrote:
Fri May 04, 2018 12:37 am
We're playing the odds when we invest, not solving a math problem.
:thumbsup Very much liked your post — it's an excellent perspective for investors to remember.
Cordially, Todd

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Re: Investing is more like poker than chess

Post by fennewaldaj » Fri May 04, 2018 1:40 am

Very much agree with this. I actually have a history as a semi professional then professional poker player for ~ 6 years. The probabilistic thinking in the face of uncertainly comes pretty naturally to me after playing millions of hands of poker. In my mind I have structured my portfolio as a series of bets with the goal to have a reasonable outcome. For example I have selected a high international ration 50% because I view it as bet designed to reduce the possible dispersion of outcomes. I also elected to overweight small and value. I am only moderately confident they will out perform (like 65%) but again I view this as reducing the dispersion of outcomes and to be a + ev bet. So in effect the portfolio is a series of bets. Likely some of them will pan out and some will not. I have not ignored efficiency frontier type of calculations but it is not the primary driver of what I selected. It seems like Paul Merriman often presents his portfolio advice in this fashion as well.

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Re: Investing is more like poker than chess

Post by pezblanco » Fri May 04, 2018 8:53 am

I don't really think it is like either one .... At least if you are a buy and hold investor (and not for example a day trader). In the face of stochastic uncertainty, we take a deterministic stance of owning a certain percentage of various identifiable asset classes and we hold them and rebalance. Poker players don't do that ... they are playing a zero sum game (or sometimes less than zero sum due to the house cut of each pot) against one or several opponents and have the need to bluff as part of their strategy. Bluffing is an essential part of poker that is not at all present in investing. I do agree that investing is not like chess due to the stochastic outcomes that investors face and must deal with ....

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Re: Investing is more like poker than chess

Post by aristotelian » Fri May 04, 2018 8:58 am

I don't really see it. Both involve a certain amount of risk-taking and managing your emotions, but there are some big differences. Speculating is more like poker because you are playing against other market participants and trying to take advantage of their inefficiencies.

Investing based on an "own the market, stay the course" strategy it seems to me requires a very different psychological skillset. You are really just playing against yourself. If you played poker based on a consistent system, your opponent would figure you out and eventually destroy you.

In poker, you have "know when to hold 'em, know when to fold 'em." In investing, you never, ever fold.

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Re: Investing is more like poker than chess

Post by dbr » Fri May 04, 2018 9:03 am

Odds are a math problem, including the odds at Poker. I would assume the main content of the book in question is about the mathematics of situations that include random variability. That investment results are uncertain is patently obvious, which is what much of the discussion of investing is all about. The application of mathematics to uncertainty does not imply that one therefore makes uncertainty go away.

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Re: Investing is more like poker than chess

Post by goingup » Fri May 04, 2018 9:29 am

That doesn't resonate with me. I'd compare investing to farming--growing crops or fruit trees. It's all about planting, tending, and harvest. But that's just not as exciting as poker.

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Re: Investing is more like poker than chess

Post by dbr » Fri May 04, 2018 9:31 am

Why does investing have to be "like" something. Almost all the time that does nothing but generate bad thinking.

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Re: Investing is more like poker than chess

Post by Random Walker » Fri May 04, 2018 9:35 am

Yes, playing the odds. Charles Ellis wrote the outstanding book Winning The Loser’s Game. I think he equates investing to amateur tennis: not what we see on tv. On tv we see spectacular winners point after point. In real life for the rest of us tennis hacks, the winner is the guy who makes fewer unforced errors. Not making mistakes is key. Sort of like taking par score in golf instead of playing the round and hoping to do better. Indexing and sticking to a plan is avoiding the unforced errors.

Dave

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Re: Investing is more like poker than chess

Post by KlangFool » Fri May 04, 2018 9:40 am

OP,

I disagreed. If a person is saving one year of current annual expense every year, why does a person need to take any substantial level of risk? In fact, in those cases, any AA between 70/30 to 30/70 will work fine. What is the risk and uncertainty in those cases?

KlangFool

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Re: Investing is more like poker than chess

Post by House Blend » Fri May 04, 2018 9:51 am

willthrill81 wrote:
Fri May 04, 2018 12:37 am
We're playing the odds when we invest, not solving a math problem.
No. Playing the odds *is* math.

Playing poker well requires some math skill, as well as some non-math skills such as the ability to bluff occasionally, and avoiding "tells".

DIY investing for the long term requires only minimal math skills to be successful. Non-math skills such as persistence and discipline are much more important.

High frequency trading is an area of investing where significant math skill is necessary. Perhaps there, in the competition among HFT shops, the poker analogy is more apt.

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Re: Investing is more like poker than chess

Post by willthrill81 » Fri May 04, 2018 10:04 am

aristotelian wrote:
Fri May 04, 2018 8:58 am
I don't really see it. Both involve a certain amount of risk-taking and managing your emotions, but there are some big differences. Speculating is more like poker because you are playing against other market participants and trying to take advantage of their inefficiencies.

Investing based on an "own the market, stay the course" strategy it seems to me requires a very different psychological skillset. You are really just playing against yourself. If you played poker based on a consistent system, your opponent would figure you out and eventually destroy you.
But even so, there is a strong element of luck as to how this strategy will actually pan out. Your portfolio might return 5% annually over the next 20 years, or it might return 15%.
aristotelian wrote:
Fri May 04, 2018 8:58 am
In poker, you have "know when to hold 'em, know when to fold 'em." In investing, you never, ever fold.
That's only true if you are practicing a buy-and-hold approach. Many, including myself, do not.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Investing is more like poker than chess

Post by KlangFool » Fri May 04, 2018 10:09 am

willthrill81 wrote:
Fri May 04, 2018 10:04 am
aristotelian wrote:
Fri May 04, 2018 8:58 am
I don't really see it. Both involve a certain amount of risk-taking and managing your emotions, but there are some big differences. Speculating is more like poker because you are playing against other market participants and trying to take advantage of their inefficiencies.

Investing based on an "own the market, stay the course" strategy it seems to me requires a very different psychological skillset. You are really just playing against yourself. If you played poker based on a consistent system, your opponent would figure you out and eventually destroy you.
But even so, there is a strong element of luck as to how this strategy will actually pan out. Your portfolio might return 5% annually over the next 20 years, or it might return 15%.
aristotelian wrote:
Fri May 04, 2018 8:58 am
In poker, you have "know when to hold 'em, know when to fold 'em." In investing, you never, ever fold.
That's only true if you are practicing a buy-and-hold approach. Many, including myself, do not.
willthrill81,

<<But even so, there is a strong element of luck as to how this strategy will actually pan out. Your portfolio might return 5% annually over the next 20 years, or it might return 15%.>>

If you win in both cases (5% or 15%), it won't matter.

<<That's only true if you are practicing a buy-and-hold approach. Many, including myself, do not.>>

In summary, investing is like gambling for those choose not to buy and hold. Is that the point of your topic?

KlangFool

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Re: Investing is more like poker than chess

Post by quantAndHold » Fri May 04, 2018 10:11 am

KlangFool wrote:
Fri May 04, 2018 9:40 am
OP,

I disagreed. If a person is saving one year of current annual expense every year, why does a person need to take any substantial level of risk? In fact, in those cases, any AA between 70/30 to 30/70 will work fine. What is the risk and uncertainty in those cases?

KlangFool
If it’s all about saving, why take any risk at all? Why not just buy TIPS?

Because...the odds say that you’ll do better by taking some risk.

A lot of investors, especially a lot of Bogleheads, think of the S&P500 returns as zero risk. That isn’t really the case.

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Re: Investing is more like poker than chess

Post by aristotelian » Fri May 04, 2018 10:14 am

willthrill81 wrote:
Fri May 04, 2018 10:04 am
aristotelian wrote:
Fri May 04, 2018 8:58 am
I don't really see it. Both involve a certain amount of risk-taking and managing your emotions, but there are some big differences. Speculating is more like poker because you are playing against other market participants and trying to take advantage of their inefficiencies.

Investing based on an "own the market, stay the course" strategy it seems to me requires a very different psychological skillset. You are really just playing against yourself. If you played poker based on a consistent system, your opponent would figure you out and eventually destroy you.
But even so, there is a strong element of luck as to how this strategy will actually pan out. Your portfolio might return 5% annually over the next 20 years, or it might return 15%.
aristotelian wrote:
Fri May 04, 2018 8:58 am
In poker, you have "know when to hold 'em, know when to fold 'em." In investing, you never, ever fold.
That's only true if you are practicing a buy-and-hold approach. Many, including myself, do not.
If you are picking stocks or timing the market, you are speculating. Which is fine, but different from investing. OP specifically refers to investing.

If you know that there is a range of expected outcomes, I wouldn't exactly call it luck when you encounter a bad market. I agree that both poker and investing require a certain level of risk tolerance (although in investing, you can take a conservative approach to minimize risk whereas in poker you don't really have that choice).

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Re: Investing is more like poker than chess

Post by willthrill81 » Fri May 04, 2018 10:14 am

dbr wrote:
Fri May 04, 2018 9:03 am
Odds are a math problem, including the odds at Poker.
Strictly speaking, that's true, but the math is on a completely different level. With chess, which I would argue has far fewer variables than those faced by an investor, the number of legal positions is estimated to be 10^40, a monstrously huge number that cannot be solved with traditional mathematics. Even today's computers that can examine millions or even billions of positions per second are only looking at a tiny proportion of the possibilities

By comparison, the math involved in calculating poker odds is a cake walk.

My point, which apparently I didn't make well enough in the OP, is that investing problems cannot be 'solved' in the traditional sense of the word. There is a strong element of chance and negative outcomes, even when done 'correctly'. A world champion of poker can easily lose lots of hands in a row and can almost as easily lose a single match, but that doesn't mean that they've lost their skill. The same applies to investment strategy. Just because buy-and-hold (or any other strategy) falls behind some other approach for a period of time doesn't mean that the strategy is broken.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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willthrill81
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Re: Investing is more like poker than chess

Post by willthrill81 » Fri May 04, 2018 10:18 am

KlangFool wrote:
Fri May 04, 2018 10:09 am
willthrill81 wrote:
Fri May 04, 2018 10:04 am
aristotelian wrote:
Fri May 04, 2018 8:58 am
I don't really see it. Both involve a certain amount of risk-taking and managing your emotions, but there are some big differences. Speculating is more like poker because you are playing against other market participants and trying to take advantage of their inefficiencies.

Investing based on an "own the market, stay the course" strategy it seems to me requires a very different psychological skillset. You are really just playing against yourself. If you played poker based on a consistent system, your opponent would figure you out and eventually destroy you.
But even so, there is a strong element of luck as to how this strategy will actually pan out. Your portfolio might return 5% annually over the next 20 years, or it might return 15%.
aristotelian wrote:
Fri May 04, 2018 8:58 am
In poker, you have "know when to hold 'em, know when to fold 'em." In investing, you never, ever fold.
That's only true if you are practicing a buy-and-hold approach. Many, including myself, do not.
willthrill81,

<<But even so, there is a strong element of luck as to how this strategy will actually pan out. Your portfolio might return 5% annually over the next 20 years, or it might return 15%.>>

If you win in both cases (5% or 15%), it won't matter.

<<That's only true if you are practicing a buy-and-hold approach. Many, including myself, do not.>>

In summary, investing is like gambling for those choose not to buy and hold. Is that the point of your topic?

KlangFool
It could easily be argued that a high enough savings rate will overcome almost any 'deficiency' when it comes to investing. My in-laws saved a large amount of money but didn't invest it in any traditional sense (i.e. 100% cash all the time). That still enabled them to retire comfortably.

But even an all-cash strategy has risks, hyperinflation being one of them.

No strategy is risk-free.

And no, I am not arguing that investing is like gambling. In real gambling, the expected return is negative, but the opposite is true of investing. But in reality, poker isn't gambling either: it's a game of skill whereby more skilled players will, over time, consistently outperform less skilled players.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Investing is more like poker than chess

Post by KlangFool » Fri May 04, 2018 10:20 am

quantAndHold wrote:
Fri May 04, 2018 10:11 am
KlangFool wrote:
Fri May 04, 2018 9:40 am
OP,

I disagreed. If a person is saving one year of current annual expense every year, why does a person need to take any substantial level of risk? In fact, in those cases, any AA between 70/30 to 30/70 will work fine. What is the risk and uncertainty in those cases?

KlangFool
If it’s all about saving, why take any risk at all? Why not just buy TIPS?

Because...the odds say that you’ll do better by taking some risk.

A lot of investors, especially a lot of Bogleheads, think of the S&P500 returns as zero risk. That isn’t really the case.
quantAndHold,

<<If it’s all about saving, why take any risk at all? Why not just buy TIPS?>>

TIPS is not risk-free either.

<<Because...the odds say that you’ll do better by taking some risk. >>

You had answered the question. If someone can only do better but not worse, is the choice risky?

<<A lot of investors, especially a lot of Bogleheads, think of the S&P500 returns as zero risk. That isn’t really the case.>>

Not me. If that is the case, my AA would be 100/0.

KlangFool

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Re: Investing is more like poker than chess

Post by willthrill81 » Fri May 04, 2018 10:21 am

aristotelian wrote:
Fri May 04, 2018 10:14 am
If you know that there is a range of expected outcomes, I wouldn't exactly call it luck when you encounter a bad market.
Then what would you call it? We all know that there is another bad market in the future, but we don't when it will it occur, how severe it will be, nor how long it will take to recover. Sequence of returns risk is very real. Call it what you will, there is a lot of uncertainty in investing.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Investing is more like poker than chess

Post by KlangFool » Fri May 04, 2018 10:23 am

willthrill81 wrote:
Fri May 04, 2018 10:18 am
KlangFool wrote:
Fri May 04, 2018 10:09 am
willthrill81 wrote:
Fri May 04, 2018 10:04 am
aristotelian wrote:
Fri May 04, 2018 8:58 am
I don't really see it. Both involve a certain amount of risk-taking and managing your emotions, but there are some big differences. Speculating is more like poker because you are playing against other market participants and trying to take advantage of their inefficiencies.

Investing based on an "own the market, stay the course" strategy it seems to me requires a very different psychological skillset. You are really just playing against yourself. If you played poker based on a consistent system, your opponent would figure you out and eventually destroy you.
But even so, there is a strong element of luck as to how this strategy will actually pan out. Your portfolio might return 5% annually over the next 20 years, or it might return 15%.
aristotelian wrote:
Fri May 04, 2018 8:58 am
In poker, you have "know when to hold 'em, know when to fold 'em." In investing, you never, ever fold.
That's only true if you are practicing a buy-and-hold approach. Many, including myself, do not.
willthrill81,

<<But even so, there is a strong element of luck as to how this strategy will actually pan out. Your portfolio might return 5% annually over the next 20 years, or it might return 15%.>>

If you win in both cases (5% or 15%), it won't matter.

<<That's only true if you are practicing a buy-and-hold approach. Many, including myself, do not.>>

In summary, investing is like gambling for those choose not to buy and hold. Is that the point of your topic?

KlangFool
It could easily be argued that a high enough savings rate will overcome almost any 'deficiency' when it comes to investing. My in-laws saved a large amount of money but didn't invest it in any traditional sense (i.e. 100% cash all the time). That still enabled them to retire comfortably.

But even an all-cash strategy has risks, hyperinflation being one of them.

No strategy is risk-free.

And no, I am not arguing that investing is like gambling. In real gambling, the expected return is negative, but the opposite is true of investing. But in reality, poker isn't gambling either: it's a game of skill whereby more skilled players will, over time, consistently outperform less skilled players.
willthrill81,

Sorry. I just do not consider anything that is not buy-and-hold as investing. Carry on with your topic. I just agree to disagree.

KlangFool

P.S.: In my book, I have a "Sleep for 5 years" rule. I do not invest on anything that I cannot "sleep for 5 years" and do nothing and it will be fine.

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Re: Investing is more like poker than chess

Post by goblue100 » Fri May 04, 2018 10:25 am

willthrill81 wrote:
Fri May 04, 2018 10:14 am
My point, which apparently I didn't make well enough in the OP, is that investing problems cannot be 'solved' in the traditional sense of the word. There is a strong element of chance and negative outcomes, even when done 'correctly'. A world champion of poker can easily lose lots of hands in a row and can almost as easily lose a single match, but that doesn't mean that they've lost their skill. The same applies to investment strategy. Just because buy-and-hold (or any other strategy) falls behind some other approach for a period of time doesn't mean that the strategy is broken.
One thing investors could learn from good poker players is not to be results oriented. Bad poker players often confuse luck with skill. Likewise, "bad" investors may get rewarded by taking undue risk for a while. Usually the luck goes away after a while.
Can't take it with you when you're gone | But I want enough to get there on - Rollin with the flow - Jerry Hayes

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Re: Investing is more like poker than chess

Post by willthrill81 » Fri May 04, 2018 10:26 am

KlangFool wrote:
Fri May 04, 2018 10:23 am
willthrill81 wrote:
Fri May 04, 2018 10:18 am
KlangFool wrote:
Fri May 04, 2018 10:09 am
willthrill81 wrote:
Fri May 04, 2018 10:04 am
aristotelian wrote:
Fri May 04, 2018 8:58 am
I don't really see it. Both involve a certain amount of risk-taking and managing your emotions, but there are some big differences. Speculating is more like poker because you are playing against other market participants and trying to take advantage of their inefficiencies.

Investing based on an "own the market, stay the course" strategy it seems to me requires a very different psychological skillset. You are really just playing against yourself. If you played poker based on a consistent system, your opponent would figure you out and eventually destroy you.
But even so, there is a strong element of luck as to how this strategy will actually pan out. Your portfolio might return 5% annually over the next 20 years, or it might return 15%.
aristotelian wrote:
Fri May 04, 2018 8:58 am
In poker, you have "know when to hold 'em, know when to fold 'em." In investing, you never, ever fold.
That's only true if you are practicing a buy-and-hold approach. Many, including myself, do not.
willthrill81,

<<But even so, there is a strong element of luck as to how this strategy will actually pan out. Your portfolio might return 5% annually over the next 20 years, or it might return 15%.>>

If you win in both cases (5% or 15%), it won't matter.

<<That's only true if you are practicing a buy-and-hold approach. Many, including myself, do not.>>

In summary, investing is like gambling for those choose not to buy and hold. Is that the point of your topic?

KlangFool
It could easily be argued that a high enough savings rate will overcome almost any 'deficiency' when it comes to investing. My in-laws saved a large amount of money but didn't invest it in any traditional sense (i.e. 100% cash all the time). That still enabled them to retire comfortably.

But even an all-cash strategy has risks, hyperinflation being one of them.

No strategy is risk-free.

And no, I am not arguing that investing is like gambling. In real gambling, the expected return is negative, but the opposite is true of investing. But in reality, poker isn't gambling either: it's a game of skill whereby more skilled players will, over time, consistently outperform less skilled players.
willthrill81,

Sorry. I just do not consider anything that is not buy-and-hold as investing. Carry on with your topic. I just agree to disagree.

KlangFool
I wasn't referring to buy-and-hold, but okay. :)

Do you agree that there is always risk present when investing, and this cannot be avoided, only managed?
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Investing is more like poker than chess

Post by willthrill81 » Fri May 04, 2018 10:28 am

goblue100 wrote:
Fri May 04, 2018 10:25 am
willthrill81 wrote:
Fri May 04, 2018 10:14 am
My point, which apparently I didn't make well enough in the OP, is that investing problems cannot be 'solved' in the traditional sense of the word. There is a strong element of chance and negative outcomes, even when done 'correctly'. A world champion of poker can easily lose lots of hands in a row and can almost as easily lose a single match, but that doesn't mean that they've lost their skill. The same applies to investment strategy. Just because buy-and-hold (or any other strategy) falls behind some other approach for a period of time doesn't mean that the strategy is broken.
One thing investors could learn from good poker players is not to be results oriented. Bad poker players often confuse luck with skill. Likewise, "bad" investors may get rewarded by taking undue risk for a while. Usually the luck goes away after a while.
:sharebeer

Results matter, but we have to be careful to not automatically conflate results with skill.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Investing is more like poker than chess

Post by quantAndHold » Fri May 04, 2018 10:29 am

I see I’m the only one in this thread who’s actually read the book. Okay.

The book isn’t an investing book. It’s a book about decision making. Her point is that the result of most decisions is a combination of the quality of the decision, and luck. We tend to look at the result of a decision afterwards and decide whether it’s a good decision or not based entirely on the result. She calls that “resulting.” Her main example was the “terrible decision” Pete Carroll, the Seahawks coach, made to run a passing play on the 1 yardline when the Seahawks were 4 points behind with 20 seconds left in the 2015 super bowl. The pass was intercepted, and the Seahawks lost. She analyzes the decision. It was actually a very good decision that only had about a 1% chance of turning out like it did. But since the result was bad, everyone called it a bad decision.

So, when applied to investing...you understand the probabilities, make decisions with those probabilities in mind, then luck takes care of the result. Isn’t that exactly what we’re doing? Jack Bogle and others did the footwork and laid out the probabilities, and we make investing decisions based on that research. Then luck happens, and we get an end result.

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Re: Investing is more like poker than chess

Post by quantAndHold » Fri May 04, 2018 10:33 am

KlangFool wrote:
Fri May 04, 2018 10:20 am
quantAndHold wrote:
Fri May 04, 2018 10:11 am
KlangFool wrote:
Fri May 04, 2018 9:40 am
OP,

I disagreed. If a person is saving one year of current annual expense every year, why does a person need to take any substantial level of risk? In fact, in those cases, any AA between 70/30 to 30/70 will work fine. What is the risk and uncertainty in those cases?

KlangFool
If it’s all about saving, why take any risk at all? Why not just buy TIPS?

Because...the odds say that you’ll do better by taking some risk.

A lot of investors, especially a lot of Bogleheads, think of the S&P500 returns as zero risk. That isn’t really the case.
quantAndHold,

<<If it’s all about saving, why take any risk at all? Why not just buy TIPS?>>

TIPS is not risk-free either.

<<Because...the odds say that you’ll do better by taking some risk. >>

You had answered the question. If someone can only do better but not worse, is the choice risky?

<<A lot of investors, especially a lot of Bogleheads, think of the S&P500 returns as zero risk. That isn’t really the case.>>

Not me. If that is the case, my AA would be 100/0.

KlangFool
So, you’re saying that you understand the basic probabilities of getting various return streams for your investments, and have made a decision based on that. That’s exactly what the book says. I wonder if you had actually read the book, instead of having a knee jerk reaction to someone else having a thought, we might have a better discussion.

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Re: Investing is more like poker than chess

Post by letsgobobby » Fri May 04, 2018 10:34 am

willthrill81 wrote:
Fri May 04, 2018 12:37 am
In the most recent episode of the "Money for the Rest of Us" podcast by J. David Stein, he reviewed Annie Duke's book "Thinking In Bets: Making Smarter Decisions When You Don’t Have All the Facts." I've heard of this book before, and while I haven't read it, the general gist that I get from the book is a very solid one: investing is not a computational exercise like chess (which I enjoy very much) but much more like a poker game, where the outcome is rarely known with 100% certainty. I think that this has very real implications for investors.

Chess is more of a computational exercise than a game. There is nothing hidden from either of the players, and there is no luck at play; it is a 'game' of pure skill. A significant skill advantage will enable one player to beat another virtually every time.

Poker has a definite element of skill to it as well, but there is also a large degree of luck in the game, particularly in the short-run. A significant skill advantage here will enable one player to beat another over the long-run, but over the short-run, anything can happen.

All too often, investors behave as if investing is like chess, looking for patterns, analyzing historical performance, Sharpe ratios, the efficient frontier, valuations, etc. as if there is a single perfect solution to their needs (literally perfect solutions exist in chess, but they are extremely difficult for most humans to find unless there are very few pieces in play). While all of these activities certainly can provide some value, we must be careful to never take them so far as to think that we can predict what will or will not happen. Most of us understand this well when it comes to predicting returns, but it literally applies to every aspect of investing. We don't know what inflation, valuations, yields, dividends, exchange rates, the dozens of different risks, etc. will be at any point in time in the future.

Investing, and personal finance in general, is more like poker: we're playing the odds while also trying to not be forced out of the game due to the occurrence of an event we perceived to be unlikely. For instance, we frequently need to allocate some portion of our portfolio to asset classes that are volatile but have been historically likely to have relatively high returns, but we also need to hedge our bets so that we will not be wiped out if the volatile asset classes don't perform the way we want them to. But even so, failure to achieve our goals is always a possibility. All roads carry risk.

We're playing the odds when we invest, not solving a math problem.
I find this an interesting thread from someone who has previously rejected EE bonds outright. After all, aren’t those just part of a broad portfolio comprising both equities and fixed income, with specific attributes under specific conditions which may or may not come to pass in an uncertain future?

In the same vein, I don’t understand those who insist on being 100% in stocks (unless very young with very little at risk), or 100% of stocks in US equities. There is no guarantee what the future will look like. We may think excessive inflation/deflation, US dollar devaluation, eclipse of US financial and military hegemony, etc., are unlikely. But unlikely does not mean impossible. For this reason 2/3 of my stocks are international - with all of my cash, real estate, fixed income, and job prospects tied up in the US, it seems anything less than that is a major and unnecessary risk.

Thanks to nisiprius I am currently reading Benjamin Roth’s, “The Great Depression: A Diary.” One quote has stuck with me: “The only conclusion I can come to is that at least half of the investor’s money should be in good bonds.” This could only be written by an individual who lived through a true financial collapse, who witnessed a world in which he wrote, “Things remain at a standstill. There is no money in circulation, the stores and business places are deserted and everybody seems to have given up their initiative. The banks are still closed, school teachers are unpaid, and there is no money to pay salaries of county and city officials.” I suspect the vast majority of today’s investors simply cannot fathom a future which looks like that, and their portfolios reflect this large blind spot. Is this a likely outcome? No. But my portfolio takes into account this possibility.

Historical agnosia led to the Tech bubble and the real estate bubble. It is a major weakness of most modern investors, analysts, and financial advisors, who simply haven’t read their history.

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Re: Investing is more like poker than chess

Post by freebeer » Fri May 04, 2018 10:38 am

willthrill81 wrote:
Fri May 04, 2018 12:37 am
In the most recent episode of the "Money for the Rest of Us" podcast by J. David Stein, he reviewed Annie Duke's book "Thinking In Bets: Making Smarter Decisions When You Don’t Have All the Facts." I've heard of this book before, and while I haven't read it, the general gist that I get from the book is a very solid one: investing is not a computational exercise like chess (which I enjoy very much) but much more like a poker game, where the outcome is rarely known with 100% certainty...
I think they picked the wrong card game to analogize. I see investing as more like blackjack than chess.

Like investing, both poker and blackjack are probabilistic and you are your own worst enemy if you engage in irrational behavior. And neither are "gambling" per se - in both cases the odds can be in your favor.

But poker is fundamentally a win-lose game vs. other people, where the fundamental mathematics is important but subordinate to the psychology and dynamics of you vs. your opponents (the house cut can be seen as just like a tax). Whereas investing is all of us collectively sitting at the table vs. the faceless "market" (house), which feels to me just like blackjack.

In blackjack, like investing, there's nothing better you can do than to follow the optimal "basic strategy" refined by recent past results (the cards in the deck that have come out so far). And similarly past results are only somewhat predictive of future returns (the deck may be rich in aces and 10s, but the dealer may shuffle up or you may get the busting 10s while the dealer gets the aces). Ulam and Von Neumann developed their simulation method based on this idea of the inexorable but random progression of future cards ... and poker was not even on offer at Monte Carlo at that time.

The way I think about it is if I double down on an 11 and draw a 5 and lose to the dealer in blackjack, I still did the right thing. Just as if I rebalance into stocks according to my investment plan but then the market tanks I still did the right thing. No reason for regret or adjustment to future behavior - just stay the course in doing what is optimal given the data you have (which unfortunately doesn't include the exact order of the remaining cards in the deck, aka actual future results). Whereas if playing poker, if I bluff or bet up in a certain situation and things don't go well, perhaps it was a mistake on my part in the "mano a mano" dynamic of the table and maybe I should adjust my playing with that group. It is the opposite of a "stay the course" situation, and actually some behavioral randomness is helpful in poker.

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Re: Investing is more like poker than chess

Post by KlangFool » Fri May 04, 2018 10:45 am

willthrill81 wrote:
Fri May 04, 2018 10:26 am
KlangFool wrote:
Fri May 04, 2018 10:23 am
willthrill81 wrote:
Fri May 04, 2018 10:18 am
KlangFool wrote:
Fri May 04, 2018 10:09 am
willthrill81 wrote:
Fri May 04, 2018 10:04 am


But even so, there is a strong element of luck as to how this strategy will actually pan out. Your portfolio might return 5% annually over the next 20 years, or it might return 15%.



That's only true if you are practicing a buy-and-hold approach. Many, including myself, do not.
willthrill81,

<<But even so, there is a strong element of luck as to how this strategy will actually pan out. Your portfolio might return 5% annually over the next 20 years, or it might return 15%.>>

If you win in both cases (5% or 15%), it won't matter.

<<That's only true if you are practicing a buy-and-hold approach. Many, including myself, do not.>>

In summary, investing is like gambling for those choose not to buy and hold. Is that the point of your topic?

KlangFool
It could easily be argued that a high enough savings rate will overcome almost any 'deficiency' when it comes to investing. My in-laws saved a large amount of money but didn't invest it in any traditional sense (i.e. 100% cash all the time). That still enabled them to retire comfortably.

But even an all-cash strategy has risks, hyperinflation being one of them.

No strategy is risk-free.

And no, I am not arguing that investing is like gambling. In real gambling, the expected return is negative, but the opposite is true of investing. But in reality, poker isn't gambling either: it's a game of skill whereby more skilled players will, over time, consistently outperform less skilled players.
willthrill81,

Sorry. I just do not consider anything that is not buy-and-hold as investing. Carry on with your topic. I just agree to disagree.

KlangFool
I wasn't referring to buy-and-hold, but okay. :)

Do you agree that there is always risk present when investing, and this cannot be avoided, only managed?
willthrill8,

We are talking past each other.

1) You are talking about the risk of returning 5% versus 15%.

2) I am talking about the risk of reaching my FI number. In this case, I can get there whether the return is 5% or 15%.

So, there is a risk in your context. But, there is no risk in my context.

KlangFool

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Re: Investing is more like poker than chess

Post by willthrill81 » Fri May 04, 2018 10:49 am

letsgobobby wrote:
Fri May 04, 2018 10:34 am
willthrill81 wrote:
Fri May 04, 2018 12:37 am
In the most recent episode of the "Money for the Rest of Us" podcast by J. David Stein, he reviewed Annie Duke's book "Thinking In Bets: Making Smarter Decisions When You Don’t Have All the Facts." I've heard of this book before, and while I haven't read it, the general gist that I get from the book is a very solid one: investing is not a computational exercise like chess (which I enjoy very much) but much more like a poker game, where the outcome is rarely known with 100% certainty. I think that this has very real implications for investors.

Chess is more of a computational exercise than a game. There is nothing hidden from either of the players, and there is no luck at play; it is a 'game' of pure skill. A significant skill advantage will enable one player to beat another virtually every time.

Poker has a definite element of skill to it as well, but there is also a large degree of luck in the game, particularly in the short-run. A significant skill advantage here will enable one player to beat another over the long-run, but over the short-run, anything can happen.

All too often, investors behave as if investing is like chess, looking for patterns, analyzing historical performance, Sharpe ratios, the efficient frontier, valuations, etc. as if there is a single perfect solution to their needs (literally perfect solutions exist in chess, but they are extremely difficult for most humans to find unless there are very few pieces in play). While all of these activities certainly can provide some value, we must be careful to never take them so far as to think that we can predict what will or will not happen. Most of us understand this well when it comes to predicting returns, but it literally applies to every aspect of investing. We don't know what inflation, valuations, yields, dividends, exchange rates, the dozens of different risks, etc. will be at any point in time in the future.

Investing, and personal finance in general, is more like poker: we're playing the odds while also trying to not be forced out of the game due to the occurrence of an event we perceived to be unlikely. For instance, we frequently need to allocate some portion of our portfolio to asset classes that are volatile but have been historically likely to have relatively high returns, but we also need to hedge our bets so that we will not be wiped out if the volatile asset classes don't perform the way we want them to. But even so, failure to achieve our goals is always a possibility. All roads carry risk.

We're playing the odds when we invest, not solving a math problem.
I find this an interesting thread from someone who has previously rejected EE bonds outright. After all, aren’t those just part of a broad portfolio comprising both equities and fixed income, with specific attributes under specific conditions which may or may not come to pass in an uncertain future?
Not every investment option, even a government bond, is a wise choice for everyone or even anyone.
letsgobobby wrote:
Fri May 04, 2018 10:34 am
In the same vein, I don’t understand those who insist on being 100% in stocks (unless very young with very little at risk), or 100% of stocks in US equities. There is no guarantee what the future will look like.
For those with long-investment horizons, 100% stocks might be the lowest risk option available to them. It depends greatly on how you define risk. If you view it in terms of volatility, then certainly stocks are very risky, no matter how long they are held. If you view risk as failing to make headway with inflation or even falling behind it and losing purchasing power, then stocks over the long-term could be argued to be one of the least risky choices; TIPS are another option here but carry their own risks.

FWIW, virtually every target date fund with a target date more than 20 years out is at least 90% equities. The 10% or less in bonds isn't likely to move the needle much regardless as to what the future holds.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Investing is more like poker than chess

Post by willthrill81 » Fri May 04, 2018 10:53 am

KlangFool wrote:
Fri May 04, 2018 10:45 am
willthrill8,

We are talking past each other.

1) You are talking about the risk of returning 5% versus 15%.

2) I am talking about the risk of reaching my FI number. In this case, I can get there whether the return is 5% or 15%.

So, there is a risk in your context. But, there is no risk in my context.

KlangFool
I find it hard to believe that anyone has no risk when it comes to their finances.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Investing is more like poker than chess

Post by letsgobobby » Fri May 04, 2018 10:53 am

fennewaldaj wrote:
Fri May 04, 2018 1:40 am
Very much agree with this. I actually have a history as a semi professional then professional poker player for ~ 6 years. The probabilistic thinking in the face of uncertainly comes pretty naturally to me after playing millions of hands of poker. In my mind I have structured my portfolio as a series of bets with the goal to have a reasonable outcome. For example I have selected a high international ration 50% because I view it as bet designed to reduce the possible dispersion of outcomes. I also elected to overweight small and value. I am only moderately confident they will out perform (like 65%) but again I view this as reducing the dispersion of outcomes and to be a + ev bet. So in effect the portfolio is a series of bets. Likely some of them will pan out and some will not. I have not ignored efficiency frontier type of calculations but it is not the primary driver of what I selected. It seems like Paul Merriman often presents his portfolio advice in this fashion as well.
I don’t have the computational mind for high level poker or chess but I learned my lesson about probabilistic thinking playing 21. I used to count cards in blackjack. One reason I quit (besides the absolute tedium) was that even with a sophisticated counting system and favorable rules, an individual player could only achieve a ~1% edge. That meant there were huge swings in cash flow and long stretches of time where despite perfect play, one could lose. Not fun.

If all investors build their entire portfolio around likely but not guaranteed outcomes, and ignore the possibility of unlikely but possible outcomes, some investors some of the time will be badly hurt.
Last edited by letsgobobby on Fri May 04, 2018 4:05 pm, edited 2 times in total.

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Re: Investing is more like poker than chess

Post by md&pharmacist » Fri May 04, 2018 10:54 am

I see it more like chess than poker. I think it depends on how much RESEARCH you do and it takes years to develop the right skills.

Too many people here drink the cool aid and don't even believe in research. Calling good moves pure luck (poker, not chess). They criticize you when you get financial information from multiple sources including Yahoo Finance, CNBC, Bloomberg, etc. They just don't believe informed decisions give you an edge. They can directly say otherwise, but in reading between the lines you know exactly what they think.

You know already I am not a fan of dollar cost averaging. You put money in at whatever random point in the market, hoping when you sell you will be up. That's poker. So "simplicity" as most want is poker.

A real strategy is chess. Where are we at historically in the markets and what actions should we take now. When to buy? When to sell? When to take on more risk and when to take on less? When to invest outside of the market (real estate, business, etc.)? This is poker to the masses, hence the indexing and dollar cost averaging, hoping we won't have a market bear like we had in the late 1965-1982 (down 75% - poker). Those who invest only what they need to, are vigilant when the market is so incredibly lofty like this, follow geopolitics, watch the 10 year treasury like a hawk (it was interest rates and oil that devastated the 1970's), absorb the consensus, understand nobody knows so one must reassess daily and be nimble and ready to act on principles, not emotions. The reality is that the masses don't do this. Would you go play a football game never having heard of football before, and expect to win?

Know the market can drop 80% however unlikely it may be. Know what keeps it down. Know what allows it to rebound as it did after 2009. Know when to be in and when to be out. Know which are the long term outperforming funds and managers. It's cliche, but knowledge is definitely power here.

They all say how do you know? It's not about knowing the future. The past has plenty of lessons. Do you learn from history?

Is your strategy safe if there is a 20 year downturn or a DOW 5,000 (85% drop)? - it has happened 1929-1932. Conversely, are you well invested for the potential of DOW 30,000, 50,000, 100,000 if the coming decades go well? Chess is being prepared for both scenarios, poker is hoping for the latter but being devastated if it's the former. That's why I'm not all in or all out at this time. Daily research will tell me what to do to protect my portfolio (the King).

Are you playing poker or chess?

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Re: Investing is more like poker than chess

Post by KlangFool » Fri May 04, 2018 11:05 am

md&pharmacist wrote:
Fri May 04, 2018 10:54 am
I see it more like chess than poker. I think it depends on how much RESEARCH you do and it takes years to develop the right skills.

Too many people here drink the cool aid and don't even believe in research. Calling good moves pure luck (poker, not chess). They criticize you when you get financial information from multiple sources including Yahoo Finance, CNBC, Bloomberg, etc. They just don't believe informed decisions give you an edge. They can directly say otherwise, but in reading between the lines you know exactly what they think.

You know already I am not a fan of dollar cost averaging. You put money in at whatever random point in the market, hoping when you sell you will be up. That's poker. So "simplicity" as most want is poker.

A real strategy is chess. Where are we at historically in the markets and what actions should we take now. When to buy? When to sell? When to take on more risk and when to take on less? When to invest outside of the market (real estate, business, etc.)? This is poker to the masses, hence the indexing and dollar cost averaging, hoping we won't have a market bear like we had in the late 1965-1982 (down 75% - poker). Those who invest only what they need to, are vigilant when the market is so incredibly lofty like this, follow geopolitics, watch the 10 year treasury like a hawk (it was interest rates and oil that devastated the 1970's), absorb the consensus, understand nobody knows so one must reassess daily and be nimble and ready to act on principles, not emotions. The reality is that the masses don't do this. Would you go play a football game never having heard of football before, and expect to win?

Know the market can drop 80% however unlikely it may be. Know what keeps it down. Know what allows it to rebound as it did after 2009. Know when to be in and when to be out. Know which are the long term outperforming funds and managers. It's cliche, but knowledge is definitely power here.

They all say how do you know? It's not about knowing the future. The past has plenty of lessons. Do you learn from history?

Is your strategy safe if there is a 20 year downturn or a DOW 5,000 (85% drop)? - it has happened 1929-1932. Conversely, are you well invested for the potential of DOW 30,000, 50,000, 100,000 if the coming decades go well? Chess is being prepared for both scenarios, poker is hoping for the latter but being devastated if it's the former. That's why I'm not all in or all out at this time. Daily research will tell me what to do to protect my portfolio (the King).

Are you playing poker or chess?
md&pharmacist,

<<Are you playing poker or chess?>>

A) Neither. I am an ignorant boring masses that choose to live my life instead of playing the game.

B) The problem with your system is that you could never be FI or retire. Hence, you have to keep on playing instead of living your life.

KlangFool

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Re: Investing is more like poker than chess

Post by KlangFool » Fri May 04, 2018 11:07 am

willthrill81 wrote:
Fri May 04, 2018 10:53 am
KlangFool wrote:
Fri May 04, 2018 10:45 am
willthrill8,

We are talking past each other.

1) You are talking about the risk of returning 5% versus 15%.

2) I am talking about the risk of reaching my FI number. In this case, I can get there whether the return is 5% or 15%.

So, there is a risk in your context. But, there is no risk in my context.

KlangFool
I find it hard to believe that anyone has no risk when it comes to their finances.
willthrill81,

It is relatively no risk.

KlangFool

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Re: Investing is more like poker than chess

Post by randomguy » Fri May 04, 2018 11:34 am

md&pharmacist wrote:
Fri May 04, 2018 10:54 am
I see it more like chess than poker. I think it depends on how much RESEARCH you do and it takes years to develop the right skills.

Too many people here drink the cool aid and don't even believe in research. Calling good moves pure luck (poker, not chess). They criticize you when you get financial information from multiple sources including Yahoo Finance, CNBC, Bloomberg, etc. They just don't believe informed decisions give you an edge. They can directly say otherwise, but in reading between the lines you know exactly what they think.

You know already I am not a fan of dollar cost averaging. You put money in at whatever random point in the market, hoping when you sell you will be up. That's poker. So "simplicity" as most want is poker.
Poker is an incomplete information game. Chess is a complete information game. You really think investing is a complete information game? Your impression of poker players is absurd. Poker players evaluate all possible information to make the best decision possible. Yes there are poor players that play hunches and the like. They go broker in a hurry. Poker is a far more complex game than chess when you look at the size of the game tree. The difference is that I can beat the best poker player in the world if I get lucky and the sample size is small enough. Have me face the 500k ranked chess player in the world, and I will lose every single match (well unless they die and have to withdraw)


Trying to match the game exactly is a bit foolish. The high level take aways are

a) In incomplete information situations, you can make the right move and lose. And you can make the wrong move and win. You have to tell the difference between the two

b) you have to be able to keep playing the game. You can't take a good bet if losing the bet limits you ability to play the game.

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Re: Investing is more like poker than chess

Post by JoMoney » Fri May 04, 2018 11:41 am

http://marriottschool.net/emp/SRT/passive.html
...
If prices in the stock market are not efficient, and investing is a skill-based game, then disadvantaged or low skilled investors who try to actively manage their portfolios will consistently lose to players with an advantage. If we reverse the premise of this paper and assume that the stock market is perfectly efficient, then advantages don't matter -- it's all luck -- and less-skilled players have the same one in three chance of beating the market as anyone else. In other words, market efficiency protects the less-skilled investor from consistently making bad investments because all stocks are fairly priced. There is, on the other hand, no such protection in a market where stocks are routinely mispriced. The active investing majority that underperforms the index will tend to be the same year after year. Thus, the argument for indexing is even stronger for individual investors if the stock market is not efficient.

The game of poker provides, in some respects, an instructive analogy. Poker is a zero sum game, similar to active investing compared to indexing, and poker combines luck and skill, consistent with the assumption of a less than perfectly efficient market. An old adage among professional poker players applies to those deciding to participate in the active investing game. "If you don't know who the mark is, get up and leave the table, because it's you."
...
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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Re: Investing is more like poker than chess

Post by MathWizard » Fri May 04, 2018 11:55 am

I respectfully disagree.

Math tells me that I cannot consistently beat the market, and that a diversified index fund with low tracking
error can give the market return (before fees) so I chose one based on quality of the company
and low fees. That is why I chose Vanguard for my IRAs.
I invest with little cost and little effort.

I do not view investing as a game. I take the approach of the "house".
I get a share of all the winnings. It's not as exciting as being a "player", but
boring investing is what made me money.

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Re: Investing is more like poker than chess

Post by willthrill81 » Fri May 04, 2018 1:00 pm

MathWizard wrote:
Fri May 04, 2018 11:55 am
I respectfully disagree.

Math tells me that I cannot consistently beat the market, and that a diversified index fund with low tracking
error can give the market return (before fees) so I chose one based on quality of the company
and low fees. That is why I chose Vanguard for my IRAs.
I invest with little cost and little effort.

I do not view investing as a game. I take the approach of the "house".
I get a share of all the winnings. It's not as exciting as being a "player", but
boring investing is what made me money.
The returns and risk you experience along the way are unknown. You cannot plan with certainty of the outcome. Being an index investor doesn't change that at all.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Investing is more like poker than chess

Post by Gadget » Fri May 04, 2018 1:26 pm

And having a financial advisor is like having to pay a 3 dollar ante for every hand, while an index fund investor gets to put in a dime ante for the same hand. Over the long haul, you can predict who will win...

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Re: Investing is more like poker than chess

Post by willthrill81 » Fri May 04, 2018 3:55 pm

randomguy wrote:
Fri May 04, 2018 11:34 am
The high level take aways are

a) In incomplete information situations, you can make the right move and lose. And you can make the wrong move and win. You have to tell the difference between the two

b) you have to be able to keep playing the game. You can't take a good bet if losing the bet limits you ability to play the game.
:sharebeer

Very well put!
Gadget wrote:
Fri May 04, 2018 1:26 pm
And having a financial advisor is like having to pay a 3 dollar ante for every hand, while an index fund investor gets to put in a dime ante for the same hand. Over the long haul, you can predict who will win...
Precisely. In the short-term, that $3 ante might not seem like much, but over the course of lots of hands, it will make a big difference in your stack.
Last edited by willthrill81 on Fri May 04, 2018 3:56 pm, edited 1 time in total.
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Re: Investing is more like poker than chess

Post by willthrill81 » Fri May 04, 2018 4:07 pm

quantAndHold wrote:
Fri May 04, 2018 10:29 am
I see I’m the only one in this thread who’s actually read the book. Okay.

The book isn’t an investing book. It’s a book about decision making. Her point is that the result of most decisions is a combination of the quality of the decision, and luck. We tend to look at the result of a decision afterwards and decide whether it’s a good decision or not based entirely on the result. She calls that “resulting.” Her main example was the “terrible decision” Pete Carroll, the Seahawks coach, made to run a passing play on the 1 yardline when the Seahawks were 4 points behind with 20 seconds left in the 2015 super bowl. The pass was intercepted, and the Seahawks lost. She analyzes the decision. It was actually a very good decision that only had about a 1% chance of turning out like it did. But since the result was bad, everyone called it a bad decision.

So, when applied to investing...you understand the probabilities, make decisions with those probabilities in mind, then luck takes care of the result. Isn’t that exactly what we’re doing? Jack Bogle and others did the footwork and laid out the probabilities, and we make investing decisions based on that research. Then luck happens, and we get an end result.
:thumbsup

Thank you for the excellent synopsis.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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whodidntante
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Re: Investing is more like poker than chess

Post by whodidntante » Fri May 04, 2018 5:10 pm

IN

Looking forward to listening to the podcast; thanks for mentioning it, willthrill81.

I see common themes. In investing, you buy investments that have a positive expectation or short investments with a negative expectation. In poker you make plays that you think have a positive expectation, and cut your losses when you don't think you should continue, well assuming that staying in will cost you additional money. The volatility in poker is much higher since most hands only have one winner, and the expenses are usually much higher (rake/time charges).

Both "games" have incomplete information and uncertainty. I might think I know what my opponent has, but I can never be sure, and I might get outdrawn, be unable to positively exploit that information, or moved off my hand anyway. I could make the hand I'm drawing to and still lose to a better hand. I could play a bad hand and win a large multi-way pot. When buying investments, I can't be sure of the outcome for a given begin/end point pair. That doesn't mean it was a bad investment.

In poker and in investing, there is a tendency to "play results" especially after realizing a loss. But that doesn't mean that the player's strategy was bad (or good).

bling
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Re: Investing is more like poker than chess

Post by bling » Fri May 04, 2018 5:22 pm

i used to play a lot of poker back in college. i even made enough to supplement various gifts to myself :P

poker taught me to ruthlessly look at everything as an EV problem. even things like bluffing and tells can be reduced to a mathematical equation. you have XX, the board is YYY, your odds of improving to the best hand on the next card is Z, then you apply a factor on those odds based on your read of everyone at the table -- it's all math.

but even the greatest poker player will go broke without sound bankroll management. if all you have is $100 and you bet $100 on one hand, well you're not going to last long even if you play perfectly. but if you had 300x the buyin, now you have enough bankroll to whether through storms and bad luck (assuming you're actually a good player).

the skills of keeping your emotions in check are definitely applicable to investing (and other areas of life), but that's where i think the similarities end.

playing poker, you're literally "grinding", playing hand after hand, hour after hour. it's mentally and physically draining. your typical buy/hold investor spends maybe a couple minutes a month (if that), invests, and forgets.

md&pharmacist
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Re: Investing is more like poker than chess

Post by md&pharmacist » Fri May 04, 2018 5:42 pm

MathWizard wrote:
Fri May 04, 2018 11:55 am
I respectfully disagree.

Math tells me that I cannot consistently beat the market, and that a diversified index fund with low tracking
error can give the market return (before fees) so I chose one based on quality of the company
and low fees. That is why I chose Vanguard for my IRAs.
I invest with little cost and little effort.

I do not view investing as a game. I take the approach of the "house".
I get a share of all the winnings. It's not as exciting as being a "player", but
boring investing is what made me money.
1965-1982. Market returns down 75% on a 16 year slide. Sometimes beating the market just requires not being in the market. If you are always all in, you are involuntarily always playing the game. Boring made us all money 1982-2018 because of the overall market trends. You could not have said that in the 1970's. Gravity can only be fought for so long, whether it was the 1929, 1965, 2007, 20??

You don't need to see it as a game, but I for one am ready to cash out some when I see a bad hand coming (post market euphoria) or completely (1969). If I'm wrong and things go back up, I am well beyond FI and don't need the returns, the returns are just icing on the cake. If I'm right, I can get the opportunity of a decade, of a lifetime, or possibly of a century.

Most agree with you and disagree with me, so you have the masses on your side. :happy

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Re: Investing is more like poker than chess

Post by TomCat96 » Fri May 04, 2018 7:35 pm

I'm about to out myself, but I have recently departed from boglehead philosophy and have started active investing again.

On that point let me be concise and say, the boglehead portfolio techniques has now for me become one tool in a greater toolbox of investing strategies. But regarding the other tools in the toolbox needed to survive active investing, I could have told you on day one investing is like poker.

And by that I mean, decision-making amidst uncertainty. The kind of analysis and decisiveness I perform now much more closely resembles poker than chess. Chess is a bit of a theoretical tool. It is a constrained space of computation where a definitive answer can be found. It teaches us that there is a "right" answer. It's just simply a matter of how complete one's analysis is.

In active investing, you competition is comprised of cheaters, people with superior capital, people with an axe to grind, nigh-omnipotent entities, people with inside information, people with superior analysis, all fighting in the water amidst a tide of macroeconomic & natural forces which are controlled by nobody in particular.

The sheer amount of uncertainty means that the proper analysis is completely unsuitable for chess. But poker isn't a bad proxy.

deikel
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Re: Investing is more like poker than chess

Post by deikel » Fri May 04, 2018 8:13 pm

Poker and Chess are games, investing is not
Everything you read in this post is my personal opinion. If you disagree with this disclaimer, please un-read the text immidiatly and destroy any copy or remembrance of it.

fennewaldaj
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Re: Investing is more like poker than chess

Post by fennewaldaj » Fri May 04, 2018 9:17 pm

Investing is obviously not exactly like poker or chess. They both involve many discrete transactions and could be considered much more akin to trading (some of the online poker pros from my generation of ~04-11 went on to work for wall street). However I think the point is that the mindset required for successful poker is more like the mindset required for investing. That is probabilistic thinking in the face of uncertainly (thinking in bets).

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Re: Investing is more like poker than chess

Post by randomguy » Fri May 04, 2018 9:28 pm

quantAndHold wrote:
Fri May 04, 2018 10:29 am

The book isn’t an investing book. It’s a book about decision making. Her point is that the result of most decisions is a combination of the quality of the decision, and luck. We tend to look at the result of a decision afterwards and decide whether it’s a good decision or not based entirely on the result. She calls that “resulting.” Her main example was the “terrible decision” Pete Carroll, the Seahawks coach, made to run a passing play on the 1 yardline when the Seahawks were 4 points behind with 20 seconds left in the 2015 super bowl. The pass was intercepted, and the Seahawks lost. She analyzes the decision. It was actually a very good decision that only had about a 1% chance of turning out like it did. But since the result was bad, everyone called it a bad decision.
They call it bad because the odds of hand off losing the game was .1%😁 Yes I made that up but the point is you can't say there was only a 1%(seems really low. Guess all the other bad outcomes like offensive pass interference, bad snap, holding, are not being counted) so it was a good choice without considering all the alternatives.

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Re: Investing is more like poker than chess

Post by aj76er » Sat May 05, 2018 1:28 am

MathWizard wrote:
Fri May 04, 2018 11:55 am
I take the approach of the "house".
This.
What we know is that for that past 200yrs, the market has risen ~67% of the time and fallen ~33% of the time. With a buy&hold approach, you are playing the better odds, same as the "house". Over a long period of time, you'll win a lot more than you'll lose. Unless the fundamental aspects of stocks as an asset class change, then buy&hold is the proper strategy over the long term.
"Buy-and-hold, long-term, all-market-index strategies, implemented at rock-bottom cost, are the surest of all routes to the accumulation of wealth" - John C. Bogle

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Re: Investing is more like poker than chess

Post by nps » Sat May 05, 2018 5:21 am

Investing differs substantially from games in that investing has no rules. It is not possible to calculate odds. And I would argue that our desire to liken it to a model with calculable odds is what produces some of its deeper sources of risk.

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